Business output declines as inflation rises

A business trends report from BDO has revealed that business output fell for the second consecutive month, indicating a persistent slowdown in the pace of growth in overall activity across the UK economy.

Despite the decline recorded in overall output, the Services Output Index rose from 98.05 to 98.29 in February. This reading suggests the services sector remains resilient, with unseasonably warm weather in February and a continued shift in consumer spending from goods to services since the Covid-19 pandemic as two potential drivers.

Confidence among UK firms has fallen to its lowest level in four years. The Optimism Index also declined to 91.40 in February, recording its fifth consecutive drop as a result of rising employment costs. This is the lowest reading since January 2021, a time when the effects of COVID-19 lockdown were still contributing to business uncertainty.

According to economic consultancy, Cebr, the UK GDP growth is set to rise to 1.1% in 2025, up from 0.9% in 2024, helped by the gradual easing of monetary policy. However, high interest rates and ongoing inflationary pressures are likely to keep growth below pre-pandemic levels.

BDO’s Employment Index dipped further, reaching 94.30 from 94.72, towards levels last seen in the aftermath of the Global Financial Crisis. Persistent inflation, weak business sentiment and subdued economic activity continue to weigh on the UK labour market.

The UK labour market has shown further signs of loosening, with a declining number of payrolled employees, falling job vacancies and a rise in the number of people claiming unemployment benefits, according to ONS.

This downward trend is likely to persist throughout 2025, especially over the next few months as businesses navigate rising labour costs set to take effect from April.

Kaley Crossthwaite, Partner at BDO, said “Business growth is happening, but it is in a fragile state. Cutting interest rates to 4.5% is a step in the right direction, but we know these cuts can take over 18 months to fully impact the economy. Businesses will need continued support in the meantime to address workplace challenges and fully reach their growth potential.”